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Mortgage rates drop: How soon until the next recession?

By Jeff Lazerson

12/6/18

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

Rate news summary

From Freddie Mac’s weekly survey:  The 30-year fixed rate improved to 4.75 percent, down 6 basis points from last week. The 15-year fixed improved 4 basis points, now averaging 4.21 percent.

The Mortgage Bankers Association reported a 2 percent increase in loan application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $484,350 loan, last year’s payment was $231 lower than this week’s payment of $2,527.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages at zero cost: A 15-year FHA at 4.0 percent, a 30-year FHA at 4.25 percent, a 15-year conventional at 4.125 percent, a 30-year conventional at 4.50 percent, a 15-year high-balance FHA ($453,101 to $679,650) at 4.0 percent, a 30-year high-balance FHA at 4.125 percent, a 15-year high-balance conventional ($484,351 to $726,525) at 4.375 percent, a 30-year high-balance conventional at 4.75 percent, a 15-year jumbo (over $726,525) at 4.5 percent and a 30-year jumbo at 5.0 percent.

What I think: 

Economic slowdown storm clouds are here.

Just a few examples are the stock market downturn, softening U.S. home sales and auto industry plant shutdowns.

Yes, of course, mortgage rates are dropping — as of Thursday, 19 basis points lower than Freddie Mac’s 2018 high of 4.94 percent just three short weeks ago.

Look no further than U.S. Treasury rates for more ominous recession signals.

Earlier this week just 11 basis points separated the 2-year Treasury and the 10-year Treasury. The last time we saw such a thin spread was May 2007 — just before the Great Recession.

Inversion is already upon us in respect to shorter-term Treasuries. This week the 5-year Treasury was 2.79 percent — lower than the 3-year at 2.81 percent and lower than the 2-year at 2.80 percent.

Why is this inverted yield curve such a big deal?

Banks tend to reduce or stop lending when shorter-term money is more expensive than longer-term money, making continued economic expansion difficult.

For example, if bankers have to offer depositors higher short-term deposit rates and then they can charge on long-term loan commitments, they are losing money from the get-go. On top of that, banks carry the additional risk that the capital doesn’t get paid back if any of their loans go bad.

How about some fun facts?

The U.S. has been in a recession 75 percent of the time at the end of every decade since the Civil War. And, recession has been upon us 15 percent of the time since the Civil War, all according to Mark Vitner, Wells Fargo Securities managing director and senior economist.

What gives?

“The Fed was too confident in raising rates,” said Vitner. “Government missteps cause recessions.”

That said, Vitner and the Wells predictions are 2.5 percent growth in 2019 and 1.8 percent growth in 2020. In other words, no recession.

Not everyone agrees.

Michael Pento of Pento Portfolio Strategies sees a recession coming in early 2019. Where are mortgage rates headed?

“It wouldn’t shock me to see the low 3’s,” said Pento.

The Federal Reserve is expected to raise short-term rates once again this month by one-quarter percent or 25 basis points. Does that mean the 2-year Treasury and the 10-year are sure to invert? Not necessarily.

“With the last rate increase, there was not a corresponding decrease in the 10-2 year spread,” said Fernando Martin, senior economist at the Federal Reserve Bank of St. Louis. “The behavior of these variables is not always the same response to the rate increase, but as the federal funds rate has been increasing, there has been a clear downward trend in the 10-2 year spread.”

On the mortgage front, if you are going to pull the trigger on a purchase or refinance, consider low or no closing costs because lower mortgage rates and refi mania are probably just around the corner.

You can do another no-cost at a lower rate soon enough.